Should you refinance or wait for your student loan forgiveness?


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Student loan debt has reached a boiling point for many Americans, and lawmakers are taking note. Cancellation of student loans was one of many college-related items on President Biden’s campaign agenda, and Congressional Democrats like Elizabeth Warren pushed it in the early months of her presidency to adopt these proposals. Student loan cancellation seems more and more possible, prompting many borrowers to question their options in the meantime. In particular, borrowers may be torn between the possibility of a student loan forgiveness and the reality of low student loan rates through refinancing.

What are the current student loan forgiveness proposals?

Biden has already mentioned that Congress should deal with easing the student loan debt crisis. But he’s already working with his cabinet to explore ways to write off student loan debt in one form or another without congressional approval. He expressed support for a proposal that would write off $ 10,000 in federal student loan debt per borrower, a move that would write off the total federal student loan debt of about 15 million borrowers. It is also supporting the overhaul of the civil service loan forgiveness to provide $ 10,000 annually for up to five years to eligible borrowers who participate in the program.

Senator Elizabeth Warren, meanwhile, urged Biden to increase the one-time relief to $ 50,000 per federal borrower. Under this plan, more than 36 million borrowers could see their federal loans canceled. Of that number, nearly 10 million borrowers currently in arrears or in default or on their student loans would see their loans completely wiped out.

Even though there is a lot of talk, there isn’t a lot of action, at least not on a large scale. Biden removed the student loan cancellation from his most recent stimulus package earlier this year, but he took more modest steps to cancel student loans for people with total and permanent disabilities and those who had been scammed by old colleges. The stimulus bill also removed the tax burden of canceling student loans until 2025, which many say paves the way for a broader strategy for canceling student loans.

Why borrowers are refinancing their student loans now

When the coronavirus pandemic hit and the Fed cut interest rates, student loan rates fell to all-time lows. Even over a year later, refinance rates are currently starting as low as 1.9% variable and 2.5% fixed.

It’s easy to see why refinancing is attractive to borrowers who took out student loans when rates were high. Federal student loans for the 2018-19 school year just a few years ago had rates of 5.05% for undergraduates and 6.6% for graduates. If you had poor credit when you took out the loans, your private student loan rates could be even higher, even in the double digits.

In today’s environment of low interest rates, many borrowers choose to refinance these loans and lock in rates below 5%. Reducing a few percentage points may not seem like a big deal, but it can ultimately save you hundreds or thousands of dollars on your loan.

The Cons of Refinancing Federal Student Loans

Many federal student loan borrowers may be considering these low interest rates, especially as the administrative forbearance comes to an end in September. However, while refinancing has few drawbacks if you have private student loans, borrowers with federal student loans have other considerations to keep in mind:

  • Biden’s rebate would only apply to federal loans. The student loan cancellation proposals outlined above are far from guaranteed, but some relief is possible – and if it does, it will only affect borrowers on federal student loans. If you refinance your federal student loans to private loans, you will no longer be eligible for any future loan relief from the federal government.
  • Refinancing eliminates other forgiveness options. Even if Biden’s proposals do not pass, there are federal student loan cancellation opportunities that you will lose if you refinance. For example, you can have an income-based repayment plan or government loan forgiveness, which cancels your student loan balance after about 20 or 10 years of payments, respectively.
  • Federal forbearance is generally better than private forbearance. When you transfer your loans from the federal to the private through refinancing, you lose your federal protections, such as deferral and the current forbearance period. These protections are vital for millions of borrowers who cannot afford to pay off their student loans due to the COVID-19 crisis. This means that if there is another holdback, your refinanced loans will not be included.

The bottom line: should you wait for student loan cancellation or refinancing?

While refinancing may be a good idea for some, it is not for everyone. Consider your options carefully to see if this makes sense. For most federal borrowers, it’s generally best to avoid refinancing, even without the prospect of a looming student loan forgiveness. Federal student loans have more advantages than private loans, and if you are committed to canceling student loans, you may be able to get it through an income-based repayment or through a PSLF if Biden’s proposals fail.

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